Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments December 9, 2021 erstellt
Beschreibung:
I estimate characteristic-sparse stochastic discount factors (SDFs) for the cross-section of expected returns via cardinality constraints. Each resulting SDF is the best feasible SDF of $K$ assets chosen from a given panel of $N$ assets. Characteristic-sparse SDFs estimated in this manner price the cross-section quite well and better than both sparse SDFs estimated via the lasso or elastic net and factor-based SDFs. The cardinality constrained model's specification is also much more amenable to economic interpretation than specifications working with factor transformations of asset returns. Overall, the results indicate that small, parsimonious, and characteristic-sparse SDF specifications are a viable approach to explaining expected returns despite the rapid growth in the number of firm characteristics associated with cross-sectional variation in expected returns